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Glenmark: Growth across businesses

Oct 30, 2012

Glenmark has announced its 2QFY13 results. The company has reported 19% YoY growth in sales and a 180% YoY increase in net profits. Here is our analysis of the results.

Performance summary

Topline grows by 19% YoY during the quarter led by growth in both its speciality and generics businesses.

Operating margins improve marginally by 0.3% leading to a 20% YoY growth in operating profits.

Bottomline increases by 180% YoY during 2QFY13. However, on excluding the extraordinary item during 2QFY12, bottomline declines by 16% YoY due to higher tax expenses.

Financial Performance : A snapshot

(Rs m)

2QFY12

2QFY13

Change

1HFY12

1HFY13

Change

Net sales

10,554

12,552

18.9%

19,237

22,955

19.3%

Expenditure

8,301

9,842

18.6%

14,017

18,596

32.7%

Operating profit (EBDITA)

2,253

2,710

20.3%

5,220

4,359

-16.5%

EBDITA margin (%)

21.3%

21.6%

27.1%

19.0%

Other income

(35)

67

91

98

8.0%

Interest (net)

333

413

23.9%

750

815

8.6%

Depreciation

247

321

29.8%

510

595

16.7%

Profit before tax

1,637

2,044

24.8%

4,050

3,047

-24.8%

Exceptional Item

1,316

-

1,316

-

Tax

(238)

477

81

695

758.7%

Profit after tax/(loss)

559

1,567

180.2%

2,653

2,352

-11.3%

Net profit margin (%)

5.3%

12.5%

13.8%

10.2%

No. of shares (m)

270.0

Diluted earnings per share (Rs)

15.9

Price to earnings ratio (x)*

24.8

*based on trailing 12 months earnings

What has driven performance in 2QFY13?

Glenmark's topline grew by 19% YoY during the quarter led by growth in both its specialty and generics businesses. However excluding the licensing income from 2QFY12, the topline witnessed healthy growth of 34% YoY.

In the generics business, the US business recorded a growth of 44% YoY, and in constant currency terms growth was at 20%. A new competitor has entered the Malarone market, due to which the company witnessed higher price erosion. Glenmark has 43 products awaiting approval of which 19 are Para IVs. EU generics witnessed robust growth of 109%, on the back of new launches. Latin America too showed healthy growth of 29%. Large part of the growth was driven by all regions except Brazil. Further, the company expects its Latam segment to break even at EBITDA levels in FY13 and Central Europe to break even at EBITDA levels in FY14.

Consolidated Business Snapshot

(Rs m)

2QFY12

2QFY13

Change

1HFY12

1HFY13

Change

Generics Business

US

3,001

4,307

43.5%

5,512

8,231

49.3%

Europe

185

389

109.6%

361

721

99.8%

Latin America

41

54

29.9%

70

93

32.5%

API

763

1,035

35.6%

1,409

2,039

44.8%

Total Generics (i)

3,990

5,784

45.0%

7,352

11,084

50.8%

Specialty Business

India

2,539

3,440

35.5%

4,793

6,238

30.2%

RoW

1,479

1,941

31.2%

2,526

3,289

30.2%

Latin America

738

937

26.9%

1,330

1,567

17.8%

Europe

378

379

0.5%

593

649

9.5%

Total Specialty Business (ii)

5,134

6,697

30.5%

9,242

11,744

27.1%

Out Licensing Income (iii)

1,184

2,297

-

Others (iv)

246

71

-71.3%

347

128

-63.0%

Total (i)+(ii)+(iii)+(iv)

10,554

12,552

18.9%

19,237

22,955

19.3%

In the Specialty segment, India witnessed robust growth of 30% vs. industry growth of 12.6%. Glenmark has increased its market share in Derma, Cardiac, Respiratory, Anti Infective, Gynecology and Pain. Importantly, the company does not see higher impact on its revenues due to pricing policy, as large part of its drugs does not fall in the NLEM list. As per management, even if cost plus pricing methodology is adopted, Glenmark's revenues will not get impacted by more than Rs 60-70 m. The other regions too witnessed healthy growth of 25%.

On the R&D front, the company incurred capex of Rs 700 m for Crofelemer drug. The USFDA has scheduled PDUFA (Prescription drug user fee act) for this drug in Jan 2013. This is when USFDA will declare the outcome for a particular drug; whether it is accepted or rejected. Over and above, the company is awaiting various results of its ongoing trials on various drugs in the next 12-18 months. Glenmark will also out license few of these drugs, irrespective of trials' outcome.

Operating margins improved marginally by 0.3% leading to a 20% YoY growth in operating profits. Further, Glenmark incurred MTM forex gain of Rs 150 m; excluding this, margins witnessed a marginal dip. This was due to higher R&D expenses which were at 8.6% of total sales vs. 6% in 2QFY13. The company has guided for a similar run rate of around 8% for 2HFY13.

Bottomline increased by 180% YoY during 2QFY13. However, on excluding the extraordinary item during 2QFY12, bottomline declined by 16% YoY due to higher tax expenses. For the full year, Glenmark expects tax rate to be in range of 17%-18% on back of the Sikkim unit becoming operational.

What to expect?

At the current price of Rs 430, the stock is trading at a price to earnings multiple of 11.6 times our estimated FY15 earnings. Going forward, the key growth drivers for the company will be the US, Latin America and ROW markets. In US especially, its focus on a niche product portfolio will augur well for the company and The Indian business is expected to show good performance, on back of increased market share. We have also seen improvement on the balance sheet side with its working capital cycle improving and the debt reducing. The company is expecting trial data for its R&D pipeline in next 12-18 months and is also looking for outlicensing partners for its pipeline. Due to the company's strong performance in 1HFY13, we have upgraded our estimates for the next three years and we have a 'Buy' view on the stock.

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